M&A transactionsi Legal frameworks and deal structures
The only permissible consideration in a merger involving a French company is stock of the continuing corporation in the merger (subject to limited cash boot). Accordingly, 'triangular' mergers are not permitted under French law. For public transactions, the tender offer (including exchange offers) is by far the most common structure. Cross-border mergers are also permitted under European law, but remain cumbersome in practice.
Board members and senior managers and other corporate decision-makers are required to act in their company's corporate interest. In addition, for publicly listed companies, the AMF must be informed of any actions by the company that may cause an offer to fail. In addition, AMF regulations require that the bidder, the target, and their respective concert parties, must respect the free play of offers and increased bids.
The AMF requires that the target of a public tender offer designate an independent expert to issue a fairness opinion on the financial aspects of the offer whenever such offer 'could potentially create a conflict of interest' within the board which might undermine the objectivity of the board's recommendation or call into question the equal treatment of shareholders. A specific regime governs the issuance of such fairness opinions, including the expert's 'independence'.ii Acquisition agreement terms
For block sales from major shareholders of a publicly listed company (including a SIIC) preceding a tender offer, sellers often request top up clauses. Support agreements (i.e., undertakings for a shareholder to tender its shares) are also authorised, unless they make any competing offer impossible (e.g., if they are irrevocable or have a break fee that is too dissuasive).
There is no obligation to enter into a formal acquisition agreement, although in practice the offeror, target (and in some cases its significant shareholders) will often seek to enter into an agreement governing the conduct of the tender offer and, where relevant, setting forth agreements with respect to the governance of the combined businesses after the transaction.
Any break-up fees (including any reverse break-up fees) must be considered to be in the best interest of the target. As a result, break fees given in the context of a negotiated business combination must be reasonable. There is, however, no express statutory or regulatory text on this topic and there is only limited jurisprudence.
Provided they are of limited duration, exclusivity agreements providing that the target's directors will not commence discussions with other potential offerors are generally regarded as permissible. These kinds of agreement (and 'no-shop' provisions or 'matching-rights' provisions) can, however, be challenged on the basis that they violate the general principles of free competition between offers and competing offers.
Once an offer has been filed with the AMF, there are very limited circumstances under which the offeror may withdraw the offer. As a corollary, at the time that the offer is first filed with the AMF, the irrevocable obligations and undertakings of the offeror must be guaranteed by at least one investment bank, which files the proposed offer with the AMF on behalf of the offeror.
In general, once filed with the AMF, the offeror may only withdraw its offer under very limited circumstances, including in the event of a competing bid, or with the AMF's prior approval if:
- the offer becomes without purpose, for example, in the event that previously competing offerors decide to initiate a joint offer; or
- the target takes actions which 'alter its substance' (either during the offer or in case the offer is successful) or increase the cost of the offer for the offeror.
In addition, French tender offer rules permit only a limited number of conditions to the offer. The only conditions that may be included in an offer are:
- the offeror making a voluntary offer may condition the closing of an offer on a minimum level of acceptance by the target shareholders;
- if the offeror simultaneously makes separate offers on two or more targets, the closing of one offer may be subject to success of the other offer;
- to the extent such approval is required, an offer may be conditioned upon receipt of antitrust approval, with certain significant limitations;
- in certain cases, where the acquirer requires shareholder approval (e.g., to issue shares or to approve the tender offer); and
- the AMF may condition the opening of the acceptance period on the receipt of mandatory regulatory approvals.
As mentioned above, France has witnessed hostile takeover battles concerning public real estate companies, including most recently Gecina's hostile bid for Foncière de Paris discussed above.
In addition, in 2011, Paris Hotels Roissy Vaugirard (PHRV) whose share capital was owned by Allianz (31.4 per cent), Covéa group (31.4 per cent) and Cofitem-Cofimur (31.1 per cent), announced that it had made an unsolicited offer for Foncière Paris France (FPF), a French listed real estate company. The first offer was filed on October 7, 2011 with a price of €100 per share. On November 29, 2011 PRHV filed a higher bid with a price of €110 per share.
As regards both bids, the target's board, with the exception of the representative of Cofitem-Cofimur (acting in concert with PHRV) who dissented, concluded that the offer was not in the interests of Foncière Paris France or of its employees, shareholders and holders of securities giving access to the capital.
In 2014, France opted out of the passivity rule, so that the board of directors may take measures aimed at frustrating a hostile bid. This obviously provides companies with greater flexibility to negotiate with a potential bidder or an alternative acquirer or to refuse an offer they do not deem to be in the company's best interests. However, any defensive measures adopted by a target in the context of a hostile takeover must be consistent with its corporate interest.iv Financing considerations
French law prohibits a target company from advancing any funds, granting any loans, or granting any security (pledge, first demand guarantee, guarantee, etc.) on its assets in furtherance of the purchase of its own shares by a third party. Accordingly, in the context of leveraged buy-out transactions, French law prevents in particular any target company from, inter alia, providing security for any loans taken out for the purpose of financing the acquisition of its own shares. Any corporate officer of a target company which has granted any advance, loan, or security in violation of the prohibition on financial assistance, may be subject to criminal sanctions and civil sanctions, and/or the concerned advance, loan, or security may be declared void. No 'whitewash' procedure is available to permit exceptions to this prohibition on financial assistance. However, the offeror can give a pledge over the shares to be purchased in the offer as part of the security package to its financing parties.
In light of the foregoing, certain post-acquisition transactions should be undertaken with caution (e.g., leveraging up the target to pay a post-acquisition dividend to the offeror, or the post-completion merger of the target with the acquisition vehicle).
In the case of real estate assets, the use of leverage to acquire the real estate directly (rather than a corporate entity that owns the asset) does not pose similar issues.v Tax considerations
With regard to the taxation of shareholders, and more specifically for the French tax resident, several rates are considered depending on the case:
The distributed income and capital gains subject to income tax are taxed as income from movable capital and those subject to corporate income tax are taxed at the standard rate (33.33 per cent).
For capital gains on the sale of shares that are subject to income tax, the progressive scale of the income tax applies and those subject to income tax the long-term capital gains (PVLT) regime may apply if the conditions are met (qualification of equity securities and holding period). In this case a specific rate of 19 per cent is applied.
For shareholders who are not French tax residents, there is a 30 per cent withholding tax concerning the distributed income and capital gains. Concerning the capital gains on the sale shares, there is an ordinary tax rate of 33.1 per cent, with some exceptions (for natural persons, companies whose profits are taxed in the name of shareholders, community companies subject to corporation tax and certain real estate investment funds)vi Cross-border complications and solutions
The direct or indirect acquisition by a foreign investor of the control of a French company involved in certain activities considered as 'strategic' requires the prior approval of the French Minister of Economy. Strategic activities include:
- cryptology, intelligence, military and defense;
- gambling, private security, wiretapping, IT security, dual-use items; and
- the integrity, security and continuity of:
- electricity, gas, hydrocarbons or other energy sources;
- water supply;
- transport networks and services;
- electronic communications service networks;
- an establishment, installation or work of vital importance; and
- public health.
Certain variations are applicable to investors from within the EU. The French administration has been increasingly vigilant in its application of this regime, and so a conservative approach should be adopted in assessing whether the regime applies.